The trap of Belarusian economy: between Russian dependence and global uncompetititveness

Alyaksander Lukashenka and the protesting Belarusian workers. Source: profile.ru 

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Editor’s Note

VoxUkraine recently published an interview with Kateryna Bornukova, academic director of the BEROC Center for Economic Research in Minsk. She spoke about the Belarusian economy, how it was affected by the coronavirus, and the mass protests against Alyaksandr Lukashenka that have been ongoing since early August. Below are its main points.

Read the full interview, conducted by Yulia Mincheva, VoxUkraine project manager, and Andriy Fedotov, communications director of the Center for Economic Strategy, here.

Belarusian economy: large public sector and dependence on Russia

Belarus’ economy is characterized by a very large public sector and dependence on the Russian economy. These two features define the difficulties Belarus may face after the crackdown of Lukashenka’s regime. A large and outdated public sector and dependence on the Russian economy also impede the sale of Belarusian products on market prices globally.

The public sector employs at least 30% of the working population and generates about half of Belarusian GDP. State-owned enterprises are a huge, inefficient sector of the economy that has already begun to actively hinder the private sector from growing, taking away resources of labor and capital.

The Russian economy is both the main market for the products of Belarusian state-owned enterprises and the main importer of raw materials, especially oil. Belarus used to buy Russian oil at a discount, and then sell oil products at market prices to Europe and Ukraine. Periodically, this energy subsidy reached more than 10% of GDP in good years, and in recent years it has been significantly reduced. Now, the Russian economy is also in stagnation, and the close connection to it explains why the Belarusian economy has not grown in the last 10 years.

Belarusian GDP, billions of US$. Source: World Bank. After the 2008 crisis, the Belarusian economy rebounded slightly but was affected by the 2014 Russian offensive against Ukraine and anti-Russian sanctions due to a huge dependence on the Russian economy and falling exports to Ukraine. Since 2016, it has been growing slowly.

The Belarusian economy had not declined much during the coronavirus pandemic. In part, this is because the country used this huge share of state-owned enterprises to mitigate the impact of the pandemic. Another part of the explanation is that Belarus did not impose quarantine.

But at the same time, Belarus has accumulated huge macroeconomic imbalances in these six months of the pandemic. State-owned enterprises worked for warehouses because exports fell and there was no place to sell products, they are working at a loss, and the budget is forced to finance all this. In mechanical engineering, some companies could not work for several months, and stocks would be enough to meet all the demand without the company operating. But such key companies as “Belaruskali,” a producer of potash fertilizers, or refining industry bring currency to the country. Tensions are already rising in the foreign exchange market due to falling exports.

Rising inequality

Inequality between workers of old town-forming enterprises and players of the global market, such as IT, grows in Belarus. This contributes to social tensions and dissatisfaction.

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In the 2000s, economic growth made it possible to significantly reduce inequality and poverty, and Belarus was one of the leaders in the region in terms of success in combating poverty and inequality, but the last 5 years have seen reversals.

State-owned enterprises are in a difficult financial situation, they have a lot of debt due to unsuccessful attempts to modernize and upgrade their equipment. And the biggest problem is created in the regional monotowns, where state-owned enterprises provide 20-30% of employment. In fact, the entire local economic eco-structure is tied to them.

At the same time, the increase in average wages observed in recent years is largely due to the growth of wages in the private sector, in particular in the IT sector. It turns out that there is a split in society: part of the population does not see any increase in income, the other part is growing rapidly. Naturally, there are social problems that motivate workers to participate in strikes.

As for people’s savings, about 30% of the population do not have enough savings to live a month without earnings. Therefore, there is now an understanding in Belarus society that workers must be supported. Several fundraisers have already been launched, and they are very successful so far. People are ready to support those who strike for the common cause.

A trap between Russian dependence and global uncompetitiveness

The economic program of the opposition leaders doesn’t have sufficient plans to raise workers’ salaries. The opposition is supported mostly politically, against dictatorship and violence, while economically the country finds itself in a trap between Russian dependence and global uncompetitiveness.

Opposition candidates, first of all, candidates who were not even registered, and at the moment one of them is outside of the country, and 2 others are in prison, talked a lot about the economy. It was said that reforms were needed. Reforms, however, mean a massive loss of jobs with vague alternatives, especially in monotowns.

Workers are frustrated because they haven’t seen recent wage growth, but in reality, opposition candidates did not represent their economic interests in the first place. They did not say that state-owned enterprises should be further developed and supported. Rather, they spoke of the need for rather painful reforms, and the support to the opposition we see is largely political, not economic, with the flow of lawlessness we have seen in a few months.

Striking workers of Belaruskali raise hands to show who voted for the opposition candidate Sviatlana Tsikhanovksaya. Source: tut.by

Generally, attempts to reorient the economy from Russian dependence are not likely to be successful due to the low efficiency of these enterprises. This is the entire public sector, primarily mechanical engineering, production of transport equipment, agricultural equipment, famous plants MAZ (Minsk Automobile Plant) and MTZ (Minsk Tractor Plant), they are focused primarily on the Russian market. It is difficult for them to be competitive in the European market.

Not just for the market. For the Belarusian food industry, which is a huge chunk of exports, the reorientation to the European Union is associated with difficulties in the sense that the European Union, as Ukrainians are well aware, protects its agricultural markets. Here, Belarus rests heavily on the political issue of relations and agreements with the European Union.

Another aspect of dependence on Russia is financial dependence. If we look at Belarusian foreign debt, half of the Belarusian public debt is either Russia’s sovereign debt or a debt to the Eurasian Stabilization and Development Fund, in which Russia has a decisive say as the largest shareholder. Therefore, the dependence is very high, and that is why not even one of the opposition candidates said that Belarus would break off relations with Russia in any way.

At the moment, confidence is completely undermined by the unprecedented wave of violence and torture that we have seen with horror. It will long repel the desire of entrepreneurs to make something, people – to show initiative of any kind, and in general, it undermined the social contract that existed in Belarus. Yes, it is a bit outdated for economic reasons and has lost its relevance, but it was still there, and it was destroyed.

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